The significance of this simple equation is very clear: the fragility of a corporation is proportional to its complexity and to the uncertainty of the marketplace in which it operates. Complexity amplifies the effects of uncertainty and vice-versa. In practice what the equation states is that a highly complex business can survive in an ecosystem of low uncertainty or, conversely, if the environment is turbulent, the business will have to be less complex in order to yield an acceptable amount of fragility (risk). High complexity implies the capacity to deliver surprises. In scientific terms, high complexity manifests itself in a multitude of possible modes of behavior the system can express and, most importantly, in the capacity of the system to spontaneously switch from one such mode to another and without early warning. The fragility in the above equation is proportional to the strategic risk of being “expelled” from the marketplace.
The closer to its critical complexity the more vulnerable is the business. Simple and intuitive. A paramount property of this approach is that, unlike in the case of a rating, it does not have a probabilistic connotation. In other words, no mention is made as to the future state of the corporation. All that is indicated is the current state of health, no prediction is advanced. The underlying concept is: a healthy organization can better cope with the uncertainties of its evolving ecosystem. The stratification of the state of health (or fragility) is operated on five levels: Very Low, Low, Medium, High and Very High. In highly turbulent environments, attempting to define more classes of risk is of little relevance. It is impossible to squeeze precision of out of inherently imprecise systems.
Let us illustrate the above concepts with an example of a publicly traded company. The computation of the state of health (rating) has been performed using fundamental financial parameters (see blue nodes in the graph in Figure 2) as well as certain macro-economic indicators (red nodes) which represent, albeit in a crude manner, the ecosystem of the corporation. Figure 2 illustrates the so-called Complexity & Risk Map of the corporation as determined using the on-line rating system developed by Ontonix (www.ontonix.com). The parameters of the business are arranged along the diagonal of the graph, while significant relationships between these parameters are represented by the connectors located away from the diagonal. Needless to say, the said relationships are determined by a specific model-free algorithm, not by analysts. The health rating of the company is “Very High” and corresponds, in numerical terms, to 89%. The map also indicates the so-called hub, or dominant variables, indicated as nodes of intense red and blue color.
Figure 2. Complexity & Risk Map of a corporation, indicating the corresponding health rating (business robustness).